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April 16 - April 25, 2020
– Berkshire seeks to keep things simple,
“so the chairman can sit and read annual reports all day.”
He believed the long-term government bond rate (plus a point or two if interest rates are low) is the appropriate discount rate for most assets. While predicting cash flows for companies is much tougher than for bonds, it can be much more rewarding.
(He recommended Carol Loomis’ Fortune article “The Dinosaurs” as a case in point.)
On a general note, Buffett said, when accounting appears confusing, avoid the company. The confusion may well be intentional and reveal the character of the management.
Buffett noted that debt is meaningless without looking at the ability to pay.
Buffett noted it is important to take care of the non-winners of the ovarian lottery. Therefore, some sort of taxation is in order. Given that few people with money and talent are turned away from free enterprise under the current system, the 28% capital gains tax is probably okay.
Over the course of the meeting, they gave out numerous such filters. Here are a few:
Opportunity Cost – Munger noted that for any corporate stock, a bond is an alternative. You must choose the best opportunity you can understand. He summed up, “Life is a whole series of opportunity costs.” Quality People - Buffett said he looks for a manager who bats .400 and loves it. Munger noted there are many wonderful people and many awful people. Avoid the awful. Stick to those who take their promises seriously. Good Businesses – Go with those that are understandable with a sustainable edge. The pond you choose is far more important than how well you swim.
Rather than age, learning is the name of the game. Munger noted it is essential to learn from both the mistakes of others as well as your own. He quoted Patton: “It’s an honor to die for your country. Make sure the other guys get the honor.”
Munger took aim at performance chasers, noting that investors need only to have a sensible way to keep wealth growing (especially if they are already rich). If someone else is getting rich, so what? Someone else will always be doing better.
He asserted that the notion that an investor or investment manager should be “required” to beat everyone else is nonsense. The real key is to know what you really want to avoid and give those things a wide berth (such as
a bad marriage, an early death, and so on). Do this and life will go much ...
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As one comedian of the time put it, “They told me to buy stocks for my old age. It worked perfectly. I bought stocks, and within six months, I felt like an old man.”
At the Wesco Financial meeting, Munger recommended “effective rationality” as a lifelong pursuit.
Buffett concluded that stocks are a perfectly decent way to make 6% or 7% a year over the next 15 to 20 years. But anybody that expects to make 15% per year is living in a dream world.
Munger observed that the most extreme mistakes in Berkshire’s history show up as opportunity costs.
Munger elegantly calls it “thumb-sucking.”
Buffett noted that it’s a mistake for any company to predict 15% growth, yet plenty of them do. For one thing, unless the U.S. economy grows at 15% annually, the 15% number catches up to you. Very few large companies can compound at 15%. Yet during the bubble, people were valuing businesses at $500 billion, and there was no mathematical calculations that would possibly lead you to justify those valuations.
Starting Early Buffett advised younger attendees to start saving early. He acknowledged that he was fortunate that his dad paid for his education. As a result, he was able to save $10,000 by the time he was 21 – a huge head start. He noted that it’s much easier to save during your teen years when your parents are taking care of your financial obligations. He surmised that every dollar saved then is worth $20. He also suggested that getting knowledge about business has a similar compounding effect. He recommended learning about local businesses – which ones are good and why, which ones went out
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He said he doesn’t really care whether they’re buying into raw-material-intensive businesses, people-intensive businesses or capital-intensive businesses. The key is to understand a company’s costs and why it’s got a sustainable edge against its competitors.
Develop your mind and good health habits when you are young, and it will enhance your life. If not, you may have a wreck at age 70.
Munger noted that one of the great inventions of all time was double-entry bookkeeping by an Italian monk. Accounting that undoes the monk’s work is merely a tool for folly and fraud, and hurts society.
He concluded, “creative accounting is a curse to civilization.”
Buffett read Ben Graham’s book, Security Analysis, in 1949 when he was a student at the University of Nebraska, and he’s read nothing since that improves on Graham.
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Buffett warned investors that management that refuses to expense options or has fanciful pension assumptions will likely take the low road on other matters as well. He cautioned, “There’s seldom one cockroach in the kitchen.”
“Everywhere you see ‘EBITDA’ in some analyst’s report, simply insert the words ‘bullshit earnings.’”
Buffett noted that inflation is the enemy of the investor. He suggested that if we had 3% real GDP growth plus 2% inflation, that would equal 5% nominal GDP growth.
Munger is fond of saying the fail rate of all great civilizations is 100%.
They mentioned the Wall Street Journal and Fortune as favorite sources and included the usual corporate filings.
Buffett advised attendees that the “market is there to serve you, not to instruct you.”
Ancient kings would have the royal fortuneteller look at sheep guts to make decisions. Today, people are still just as crazy as that king, looking for people who pretend to know the future, giving Wall Street economic incentive to sell its nostrum.
A new book has been introduced to our curriculum, Poor Charlie’s Almanack (a nod to Munger’s hero, Ben Franklin).
lie behind the troubles at Fannie Mae and Freddie Mac.
Buffett noted that, as a general rule, he ignores what is hot.
He concluded that if you buy convulsion and remember that the market is there to serve you, not instruct you, then you cannot miss.
Buffett asserted that Berkshire has the lowest turnover of any major company, and that is attributable to the owner attitude of Berkshire’s shareholders.
Historically, when corporate profits get to around 8% of GDP, there’s a reaction, such as higher taxes.
He finds it socially revolting when a government preys on its citizens rather than serving them. A government shouldn’t make it easy for people to take their Social Security checks and waste them by pulling a handle. In addition, other negative social things can flow from gambling over time.
He claimed that his best ideas haven’t done better than others’ best ideas, but he’s lost less on his worst ideas.
Buffett added that as far as he’s concerned, he hasn’t given up anything. He hasn’t changed his life. He couldn’t eat any better or sleep any better, so he really hasn’t given up anything. Someone giving up a trip to Disneyland to make a donation is the one making a real sacrifice.
(especially chapters 8 and 20),
Munger rued that elite schools teach that the secret of investment management is diversification. They have it backasswards he asserted. Non-diversification is the key.
What you need is a CEO with risk aversion in his DNA and the ability to resist employees who want to copy others to make money.
Buffett summed up that he could have more leverage at Berkshire, but for what? Why expose the company to ruin and disgrace for an extra percentage point of return? You cannot farm-out risk management. Buffett willingly accepts lower returns for being able to sleep well, whatever may come.(102)
He believes China is clearly on the right track and that it is a mistake to take what you like least about something and then obsess about it.
He strongly recommended Robert Cialdini’s book, Influence, for the task. He also recommended Cialdini’s newest book, Yes, noting that Cialdini is the rare social psychologist who can connect the world of theory and daily life.
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Buffett added that this false precision only arises with very high IQs. You only need an IQ of 120 or so to be a good investor. In fact, he suggested, if you have a high IQ, keep your 120 and sell the rest. Higher math can lead you astray.
In thinking about markets, it is important to remember that markets are there to serve you, not instruct you. The key here is emotional stability, to have an inner peace about your decisions. It is important to think for yourself and to make good decisions over time.(108)
However, Munger also noted that every business should decline some business – that we should aspire to a higher standard than merely what is legal.
